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Be aware of mortgage changes

Posted Mar 19, 2010 By Pierre de Varennes

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What do nearly all home buyers in Canada have in common? Most of them need a mortgage in order to purchase their home. So it's important for buyers to be aware that a few weeks ago, the federal Finance Minister, Jim Flaherty, announced changes to the rules governing mortgage lending in Canada.

These changes had been expected since Flaherty made a vague reference to them in a post-Christmas television interview, but they did not include further tightening of the allowed amortization period (which in 2008 was reduced from 40 years to 35 years), nor did Flaherty increase the minimum down payment percentage that borrowers need to pay. That minimum currently stands at five per cent of the home's purchase price.

However, what the rule changes do require are the following:

Borrowers will need to have the resources to qualify for a five-year fixed-rate mortgage even if they decide on a lower-cost variable rate mortgage.

The maximum amount that can be withdrawn when borrowers refinance their mortgages (and draw out additional equity) will be 90 percent of the value of the home, down from 95 percent.

A minimum down payment of 20 percent will be required for insured mortgages tied to properties purchased as speculative housing investments not occupied by the owner.

These new rules come into force on April 19. The government says it has made these adjustments to its mortgage rules in an attempt to prevent a U.S.-style "housing bubble" in Canada.

What do the changes mean for home buyers? The first rule will have the most impact on those hoping to enter the housing market. Asking all buyers to qualify for a five-year fixed-rate mortgage is intended to ensure that, if rates do increase during the term of a variable-rate mortgage, borrowers won't have trouble making their payments at the new, higher interest rates.

That means that lenders will be looking more closely at borrowers' debt-service ratio. Lenders want to see that the sum of all of a borrower's loan payments and their mortgage payment do not exceed 42 to 44 per cent of their gross income, and that the combined mortgage payment and taxes does not exceed more than about 30 per cent of their gross income.

The second rule change will affect those who already own a home and wish to refinance it to use some of the equity they have built up. The lowered limit is intended to keep homeowners from owing more to their lender than their home is worth.

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